Bankruptcy Doesn’t Shield Employees from WARN Act Layoff Notice Requirements—Unless an Exception Applies
November 16, 2022
Layoffs often accompany corporate bankruptcy, and employers should be aware of the legal obligations that impact mass layoffs and plant closures. Most notably, the federal WARN Act requires employers to notify the workforce of a mass layoff, a temporary shutdown, or a closure of all or part of a business.
Employers that fail to provide adequate notice could be on the hook for damages of back pay and benefits-related compensation per employee for each day the company violated the WARN Act (up to 60 days).
Employers may still be liable for damages and penalties even if the layoffs or plant closure is in the context of bankruptcy unless an exception applies. Among those exceptions for which bankruptcy-related layoffs may not be subject to WARN Act notice requirements are:
- Faltering company: The Department of Labor has said that the WARN Act’s requirements don’t apply if, before a mass layoff or plant closure, the company was actively seeking capital and, in good faith, reasonably believed that providing advance notice would prevent the business from obtaining such capital and the new capital would allow the company to avoid or postpone a shutdown for a reasonable period.
- Unforeseeable business circumstances: If the mass layoff or plant closure is caused by business circumstances that were not reasonably foreseeable at the time the 60-day notice would have been required. This exception has been applied to mass layoffs due to the Covid pandemic. See In re Art Van Furniture, LLC, 638 B.R. 523 (Bankr. D. Del. 2022).
- Liquidating fiduciary exception: WARN Act notice requirements generally do not apply to a bankruptcy trustee whose sole function is to wind down the business. Unlike when the employer is operating the business as a debtor-in-possession, trustees liquidating the business are not subject to the notice requirements. If, however, the trustee continues to operate the business for the benefit of creditors, the trustee would be subject to the WARN Act obligations.
Whether or not a liquidating fiduciary is deemed an “employer” under the WARN Act depends on the circumstances and specific activities of the business, not solely whether the company maintains some employees. Courts have determined that the more closely the business activities of the debtor business resemble its pre-bankruptcy operations, the more likely it is that the entity is deemed an “employer.” If the activities resemble those of a liquidation or business wind-down, the entity is likely not subject to WARN Act notice requirements. Official Comm. of Unsecured Creditors of United Healthcare Sys., Inc. v. United Healthcare Sys., Inc. (In re United Healthcare Sys., Inc.), 200 F.3d 170 (3d Cir. 1999)
The attorneys in LP’s Financial Services & Restructuring Group and Employment & Executive Compensation Group have significant experience advising clients in connection with layoffs and bankruptcy. If you have any questions, please don’t hesitate to reach out.